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Gary Wolfram: Why income inequality is overrated

Income inequality is better than the alternative, widespread poverty.

Income inequality is better than the alternative, widespread poverty.

President Barack Obama has made income inequality front page news. But he really could use a course in how free market capitalism works.

Free market capitalism is based upon voluntary exchange. People are free to purchase what they want and are not forced to buy things they don’t want. (What does that tell you about Obamacare?) People are free to sell their labor without a central planner telling them at what rate they can sell it. (What does that tell you about the minimum wage?)

In a market system, you can only get wealthy by pleasing others. If you can produce a good or service, whether it fixing their faucet or bringing two companies together, at a price that people are willing to pay, then you will earn income. If you are not very productive, or can’t get very many people to buy your services, then you will be poor.

When giving lectures I often ask my audience how many of them have ever used a Microsoft product. Nearly all of them raise their hands. Then I ask how many have paid to hear me speak before. Few raise their hands. Then I say “that’s why Bill Gates is rich and I am not.”

As the world becomes more market-based it will be possible to please billions more people than before. You can now please more than a billion Chinese whom you couldn’t have pleased in 1978. The same is true of India as it has moved into a market capitalist system.  This means that the richest among us will become richer than before.

But this is a good thing because it means that billions of people have goods and services they didn’t have just a few years earlier. The fact is that market capitalism will create income inequality, as some will be more productive and innovative. But it also means that the poorest will be become richer.

Suppose that you can pick whatever country in the world you can be born into, but you will be the poorest person there.  You would pick a country that is market capitalist over any centrally-planned state. You won’t say “I want to be the poorest person in North Korea, or Cuba.”

The Fraser Institute does an annual study that ranks countries based upon their economic freedom.  If you are in the poorest 10 percent of the income distribution, you will be ten times wealthier if you are in a country that is in the top one-fourth of economically free countries than if you are in a country in the bottom one fourth of economic freedom.

We should be focused on how wealthy the poor are, rather than a difference in incomes. If you want income equality, go to a refugee camp in Sub-Saharan Africa. Years of central planning has impoverished billions of people there.

The deck is stacked against those who cannot or do not produce much of what others want. The solution to this problem is not to reduce the incentive to produce for others by raising taxes on the rich, but rather to make the poor more productive.  A key to this is to change our educational system to one that is like the system that produces smart phones–market capitalism.

We must focus on helping the poor, not the politics of envy. It is time to admit that our urban poor children are not being well-served by our current educational system and that this will not be made better by putting more money into a flawed system.

Rather than misguided proposals such as raising the minimum wage, we must create a market in education that is consistent with how we produce other goods and services. Give our urban poor children a chance to go to schools that compete with one another to provide quality education. Only then will the problem of poverty, which is the true problem, be solved.

Gary Wolfram
William E. Simon Professor in Economics and Public Policy at Hillsdale College and President of Hillsdale Policy Group, a consulting firm specializing in taxation and policy analysis. He earned his Ph.D. at the University of California-Berkeley, and he has taught at several colleges and universities, including Mt. Holyoke College, The University of Michigan, and Washington State University. His government experience includes a stint as Washington chief of staff for Michigan Congressman Nick Smith, being senior economist for the Michigan State Republican policy staff, and serving as Michigan's deputy state treasurer for taxation and economic policy. His publications include "A Capitalist Manifesto: Understanding the Market Economy and Defending Liberty" (Dunlap Goddard, 2012), and several works on Michigan’s tax structure and other public policy issues. He has written for numerous publications including Human Events, The American Spectator, The Washington Examiner, and The Detroit News.